Since the spring, taxpayers across the country have turned kitchens, living rooms, bedrooms or other rooms of their homes into temporary offices. With so many people currently working from home and the likelihood that this could continue for the foreseeable future, a reasonable question becomes whether a home office deduction is now available. This article will address the requirements to take this deduction on a tax return.
Business use of home
In general, certain taxpayers can deduct business expenses related to their personal residence for space used exclusively and regularly in connection with a trade or business. Self-employed taxpayers or individual partners in partnerships can qualify. Employees working from a home office are no longer eligible to take a home office deduction. This itemized deduction was suspended from 2018 through 2025 to help “pay for” the doubling of the standard deduction under the Tax Cuts and Jobs Act (TCJA).
Eligibility for a home office deduction is created if the space is exclusively used (and is the principal location) to meet with patients, clients or customers in the normal course of business, or is where management or administrative functions (such as billing, maintaining books and records, ordering supplies, scheduling appointments, etc.) are performed. Occasional duties conducted at other locations, including hotels and customer sites, will not necessarily preclude the taxpayer from qualifying for a home office deduction. There are special rules for daycare providers not discussed in this article.
Once it is determined the taxpayer can take a home office deduction, certain expenses of the home are divided between personal and business use. Personal expenses cannot be used in this computation. Costs directly associated with the trade or business, such as painting or repairs of the business space, would be deductible in full as a home office expense. Indirect expenses, including homeowners insurance, rent (if the taxpayer does not own the home) and utilities, are allocated to the home office using the percentage of the home being used for business (typically determined through a square-footage allocation). The same percentage of mortgage interest and real estate taxes would be deducted as part of the home office deduction instead of an itemized deduction on Schedule A.
Homeowners can also depreciate (accounting for the wear and tear of the structure but not the land) the business portion of their home. Permanent improvements made to the home office can be depreciated as well. However, depreciation of the home office has to be recaptured as ordinary income once the home is sold. In other words, the cumulative amount of depreciation deducted is not eligible for the primary residence sale exclusion.
The home office deduction is limited (using a formula) if total business expenses are less than the gross income. Any carryover can be deducted the following year subject to the same limitation. In addition, special rules exist when taxpayers operate more than one business in the home or have more than one place of business.
In an effort to reduce the recordkeeping burden on taxpayers, the IRS introduced the simplified method to determine the home office deduction amount. Instead of tracking separate expenditures of the home as described above, merely multiply $5 by the allowable square footage of the business portion of the home (using the smaller of 300 square feet or the actual space). The deduction cannot exceed the net income (receipts less nonhome-related expenses) from the business use of the home. Using this method means taxpayers do not need to adjust the amount of mortgage interest or real estate tax reported on Schedule A when itemizing deductions. The home office space is also not depreciated under the simplified method (meaning no recapture is necessary upon subsequent sale).
Taxpayers can alternate between using actual expenses or the simplified method from one tax year to the next. However, any carryover of actual expenses cannot be used in a tax year when the simplified method is used to compute the home office deduction.
In addition to your Baker Tilly tax advisor, the IRS website has several resources available to assist taxpayers in taking advantage of the home office deduction. Form 8829, Expenses for Business Use of Your Home, with its instructions, along with Publication 587, Business Use of Your Home, and FAQs - Simplified Method for Home Office Deduction can all be used to help determine eligibility and calculation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.